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Any big changes to SAAS Revenue Recognition?

SaaS Revenue Recognition

I am interviewing for a SAAS company and it has been about 5 years since I was in that position. With all of the pronouncements coming out on software recognition, has there been any substantial changes to the basics, i.e. we would have a monthly subscription fee revenue (take full revenue in month they were charged and used the product) and any support and maintenance would be amortized over the contract period?

Answers

Topic Expert
Bob Scarborough
Title: CEO
Company: Tensoft, Inc.
(CEO, Tensoft, Inc.) |

Yes - most definitely.

EITF 08-1 impacts SaaS companies because it changes the prior guidance of EITF 00-21 from the Residual Method to the Relative Selling Price Method. The criteria for separating contracts into separate elements is also different under 08-1.

SaaS companies may find there are more elements to account for in transactions and they are required to have values for all elements, not just the undelivered elements. Because 08-1 is a recent accounting change, best practices are still evolving.

Companies may find that their current accounting system may not adequately address issues under the new guidance and may need to consider manual workarounds or changes to their accounting system and polices.

Good luck with your interview!

Bob Scarborough (www.tensoft.com)

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

One of the biggest impacts of 08-1 is that previously companies would have to recognize any associated implementation services over the term of the SaaS license, since they do not have fair value for the license as defined under 00-21. 08-1 modifies 00-21 so that companies are forced to come up with a value for the SaaS license, which may allow for the services to be separated and recognized over the implementation period, thus accelerating (and simplifying) the revenue recognition.

The key (and pretty much the only) criterion for separating implementation services is there has to be standalone value, which in practice means it is (or could be) available from other vendors. The standard here is fairly liberal since you don't have to show that vendors have actually implemented your software -- though that standard could vary depending on who your auditors are.

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